Rush Limbaugh is the most extreme face of American TV’s neo-fascism; he is the guy who comes within an ace of calling Obama ‘that nigger in the White House’ and would do so if he could weather the storm and get away with it. However, there are places that even Rush would not rush in; already known as a primitive, redneck, maybe he does not want the additional label, ‘fruitcake’. Our RMB is much bolder.

Recession 2008 a la RMB

The opening paragraphs of an article "The problem of unsustainable growth" by RMB Senanayake in the Sunday Island July 26 business section offers the following gem.

It gets even more hilarious as you go on with more clueless statements not attributable to any "free market economist" worth his salt. I provided a sketch in the Sunday Island of 2 August of the cacophony of four Nobel Prize winning macroeconomists, other top "free market economists", The Economist, and luminaries of the bourgeois world; but nothing as fictitious as RMB’s fairy tale. Let me continue the quote.

"(T)he US government instead of funding it (home ownership) through a subsidy in the budget manipulated the credit system to force more lending in support of low income housing. It used regulatory and political pressure to force banks and government controlled (Freddie Mac and Fannie Mae) or regulated private entities to make loans they would otherwise not make and to reduce lending standards to enable people to have access to mortgage financing. Tax preferences were given to borrowers and net capital requirements of banks were reduced for lending for mortgages and taking mortgage backed securities, weakening the banks. The government created the conditions for the housing bubble".

Look, this chap doesn’t live on planet earth! I have no love for the US government especially in its incarnation as the 2001-2008 Bush Administration when the housing bubble really blew up, but what RMB says is pure fiction. The government did not "manipulate" the credit system, but the private sector did in every conceivable way and manipulated every conceivable loophole. I will deal with the housing bubble separately.

Sweeping away the hogwash

The whole alphabet soup of derivatives products, credit default swaps and mortgage backed securities are not the creation of the government but of investment banks and ‘quants’ working for financial houses and hedge funds. The Black-Scholes formula for pricing options and modelling risk was not the brainchild of evil minds in the Treasury but of harebrained Nobel Prize winning bourgeois theorists. Lehman Brothers, AIG, CitiGroup, General Motors, Chrysler and hundreds of hedge funds were, I suppose, in RMBview, Washington engineered collapses caused by state intervention in the free economy in the land of the free. And in RMB’s imagination Bernie Madoff, no doubt, is a CIA mole planted by the White House!

In all my researching of the crisis I have not heard any eminent economist say that the US government caused this calamity for capitalism by interfering with the free market. And since 2000, mind you, we have had the most neo-conservative rightwing administration in Washington since Regan. The complaints of those who hold government partially responsible have been just the opposite, as follows. Too little regulation of finance capital and derivatives products and markets; too low interest rates (the Fed is an independent body sensitive to business, not government, except during deep crisis); permitting undisciplined capitalist market economics to run wild; Congressional repeal of regulatory provisions introduced in the wake of the Great Depression, and so on.

The principal onus is on bankers, financiers, and fund and corporate managers. The discourse in the intelligent non-Marxist world (there is still a bit of it around) is about who should take most of the blame. When Alan Greenspan cut interest rates from 6.5% to 1% in 2001-2002 - and this certainly fuelled bubbles - he did so for no other reason than to bail out capitalism after the dot-com crash. Hence the dot-com crash, and house and asset price bubbles and consumer credit explosion, are empirically linked. They are also driven by a common underlying cause, the falling rate of profit in the real economy. And how would RMB explain the dot-com crash as anything other than the speculative side of capitalism gone mad?

The house price bubble

Policies to promote home ownership are found nearly everywhere and in the US go back to 1977 when banks were required to increase lending to distressed inner-city housing. This is quite normal and did not engender market disruption since the initiatives were a drop in the ocean compared to the trillion dollar scale of the US economy. Tax relief for home ownership (single family affordable housing tax credit) signed by Bush in 2003 was similarly miniscule – a mere $2.4 billion. The government did not "force banks" and Freddie and Fannie to make loans in any sense that can be described as the root of the crisis. And by the way Fannie and Freddie were not "government controlled" before the crash; they were nationalised afterwards as a consequence of the crash. They were stock-holder owned corporations with the additional benefit of "government sponsorship", that is their liabilities were underwritten by the government.

What really set free the housing demon from 1997 onwards was that America was awash with capital as Chinese, Japanese and petro dollars generated by the country’s huge trade deficit came careering back in a trillion dollar tsunami. Foreign central banks and investors bought US Treasury and corporate bonds releasing these funds back into the US domestic market. This combined with the collapse in the rate of profit in the capitalist real economy, and low interest rates, drove the housing bubble, the crazy asset price bubble and consumer credit explosion.

It was "speculative madness", "a mania" infinitely bigger than the Tulip Mania and the South Seas Bubble. Banks and mortgage providers desperately tried every stratagem to entice borrowers – lenders were crawling like lice all over the body public selling crooked deals to gullible people. Dozens of books advocating home ownership appeared on the shelves from 2001 to 2005 and there was an abundance of promotional TV programmes courtesy the advertising arm of capitalism. For reasons of space I cannot deal with speculation and market manipulation by the greatest investment banking houses such as Goldman Sachs, but ample material has come to light since the start of the crash.

The house and asset price bubbles supported the securitisation mania. The notional value of the US derivatives market had risen to $160 trillion by 2007 while US GDP was about $10 trillion, and according to one estimate the total value of US assets was only $60 trillion. These levels of pathological mismatch are symptoms of late capitalism in an advanced state of decay, its death rattle. RMB’s version of Aesop’s Fairy Tales aside, Western governments are now dealing with the crisis using massive doses of state capitalist intervention. Free market capitalism in its neo-liberal avatar is no more; RIP and GROBR.

Graphs

Two graphs, both corrected for inflation, are shown to support my arguments. A Yale University professor, Robert Schiler, has collected and charted US house prices since 1890 and his charts have become standard reference. One graph shows the close relationship between prices and the general economic health of capitalism. For example the effect of World War One and the Great Depression are clear, but more significant for this article is the boom starting 1997 as a result of the fall in the rate of profit in the real economy, the Fed’s collapsing of interest rates after the dot-com bust, and the tsunami of US trade deficit fed dollars coming home to roost as Treasury and corporate bonds. The bubble was the result of these basic economic factors; it has little to do with RMB’s nursery tale of government promotion of low income home ownership. The source of this graph is http://talkstates.com/forum/general-u-s/588-history-u-s-housing-prices-1890-2006-a.html.